Sunday, 27 May 2012

A worse crime?

Yesterday, 32 children were among 90 people killed in Houla, Syria. The international community has united in its condemnation of the people responsible for this atrocity. Predictably, the Syrian government denies any responsibility and blames "terrorists": while the opposition Free Syrian Army, equally predictably, claims it was done by government forces. Reports from the area are inconclusive, though there seems to be a prevalent belief that this was the work of a brutal and terrified government.

Whenever children and the elderly are murdered in large numbers, particularly for political motives, there is always an international outcry. I certainly don't defend such behaviour, whether perpetrated by government forces or opposition. But I could ask in what way the death of a child or an old person is worse than the death of a mother or father, whose children are left without anyone to care for them. I could ask in what way death is worse than survival, maimed and unable to care for oneself. I could ask in what way sudden death by bullet or knife is worse than slow death from starvation and disease in a region crippled by war, famine or poverty. And I could ask why the murder of 32 children deserves international condemnation, but wilful destruction of the future of millions of young people through harsh and misguided economic policies matters not at all.

In a recent report, the International Labour Organisation (ILO) notes that global youth unemployment is almost 75 million, representing 12.6% of the global workforce, and is expected to stay elevated for years to come. It describes a "scarred" generation of young workers facing "a dangerous mix of high unemployment, increased inactivity and precarious work" in DEVELOPED countries, plus persistently high working poverty in the developing world. And in its report produced with input from young people themselves, the ILO notes that the problems young people face in developed countries stem from the 2008 Global Financial Crisis.

The EU has also produced a useful report explaining its unemployment statistics. Or rather, the report's charts are useful - and horrifying. Here is the trend chart for youth unemployment in the EU itself and in the Eurozone:

I have to say that I find the accompanying textual explanation of youth unemployment trends disgracefully complacent. It suggests that unemployment among young people is now more of a problem in the wider EU, which includes the UK and Eastern Europe, than in the Eurozone. This is what this chart shows, but it is misleading. It is a fine example of what happens when you assume that what is true at the aggregate level also applies to the individual items underlying it - what is known as "fallacy of division". Eurozone youth unemployment rates look better than EU ones not because there is less of a problem but because of massive disparity between youth unemployment rates in the different member states. Youth unemployment levels in Spain and Greece are over 50%, the highest in Europe and among the highest in the world, but this is balanced by much lower youth unemployment rates in Germany. The EU has resorted to abuse of statistics to create an artificially rosy picture of the situation in the Eurozone.

The accompanying table of youth unemployment ratios by country (the proportion of total unemployed that is made up of young people) also shows increases since 2008. So not only has youth unemployment risen as a consequence of the financial crisis, young people were - and are - disproportionately affected by it. Adults are finding work at the expense of young people. This is consistent with the findings of the ILO quoted above. And the ILO's report talks about disillusioned young people, unable to find work, experiencing health problems, drug and alcohol abuse. Unemployment early in life can set a pattern for the whole of life. It is known that prolonged unemployment among adults leads to skills loss, which makes it harder to get employment: but in young people prolonged unemployment prevents them developing the skills in the first place and sets up a pattern of inactivity that may make them unemployable. Persistent, lifelong unemployment devastates families, ruins health and shortens lives. And study after study has demonstrated links between unemployment, poverty and violence. This one, by Danny Dorling at the University of Sheffield, shows clearly how murder rates rise as poverty increases (h/t Dr. Anne Brunton).

The failure of the leaders of European nations to deal adequately with the 2008 financial crisis and its aftermath has blighted the future lives of an entire generation. How is this any better than the murderous behaviour of the Syrian regime? How dare the leaders of countries that, through their failure to manage their economies to the benefit of their people, are wrecking the lives of millions of young people, condemn the behaviour of a regime that may have murdered thirty-two? Such hypocrisy beggars belief.

And what appals me the most is that there is still no change in the economic policies that have brought about this situation. The Eurozone leadership refuses to act either to end Greece's agony or to bring relief: the UK leadership continues to pursue policies that will increase unemployment: the Spanish and Irish leadership still give higher priority to bailing out banks than ensuring that their young people have a future.  The EU leadership talks about policies to address youth unemployment. But so far it has done very little, and if the rhetoric in the Unemployment Trends report is anything to go by, it is not clear that it really recognises the nature of the problem. It notes that the Employment Policy Guidelines (2008-10) encouraged member states to:
  • work with renewed endeavour to build employment pathways for young people and reduce youth unemployment, in particular, through adapting education and training systems in order to raise quality, broaden supply, diversify access, ensure flexibility, respond to new occupational needs and skills requirements, and;
  • take action to increase female participation and reduce gender gaps in employment, unemployment and pay, through better reconciliation of work and private life and the provision of accessible and affordable childcare facilities and care for other dependents.
But the 2008 financial crisis wasn't about skills, it wasn't about gender gaps and childcare, it wasn't about work/life balance. It was an economic crisis that destroyed jobs and opportunities across Europe. And it is STILL an economic crisis destroying jobs and opportunities across Europe. The Europe 2020 report bewails the fact that the "crisis has wiped out recent progress". And it comes up with lots of lovely ideas for improving education, investing in R&D, extending employment participation, encouraging "green" initiatives and lifting people out of poverty. Fantastic. But unless the EU can find a way of ENDING THE CRISIS, none of these will happen.

As long as the leaders of European nations continue to pour money into insolvent banks and wreck their economies in order to prop up a dysfunctional financial system and a failed currency experiment, economic activity in much of Europe will continue to decline and youth unemployment will continue to increase. And they will be as guilty of murder as the Syrian regime - but on a much, much larger scale. 

Saturday, 26 May 2012

The European disaster story

As you all know by now, I like charts. They tell stories.

Here's a pretty chart:

(apologies for Google's misplacing of UK's label - should be between Germany & Italy).

What this chart tells us is that unemployment in Europe was FALLING, generally, until 2008. Since then it has risen sharply and continues to rise in all these countries except Germany.

Then there's this chart:

This chart tells two stories. The first is the effect of the Euro in synchronising growth among Eurozone countries. The synchronicity is striking - the UK, which is not a member of the Euro, stands out like a sore thumb. This chart suggests that the Eurozone countries are coupled closely together and an adverse shock in one is likely to have serious consequences for the rest - as we are seeing at the moment.

The second story that this chart tells is related to my first chart. All the Eurozone countries in this chart were growing at a similar pace - until 2008. The UK's collapse starts earlier, but the rate of collapse steepens in 2008. And NONE of these countries - not even the mighty Germany - has yet recovered.  In most of them, GDP is still falling (note that the scale of this graph means that the catastrophic collapses of Ireland and Greece don't show up clearly as their economies are much smaller than the rest).

Since 2008, unemployment in Europe has risen as GDP has fallen. But it is fair to say that in some countries the fall is sharper than it is in others.  This might have something to do with it:

Government debt as a percentage of GDP has of course risen as GDP has fallen. But ABSOLUTE government debt has also risen, so this is not wholly a cyclical effect:

Note the spike in Germany's debt caused by its support of other Eurozone countries, notably Greece.

And finally - two charts that have caused a lot of controversy:

The first is absolute government spending, and the second is government spending versus GDP. I know you've seen these charts before, but I've included them in this short summary because they complete the story. Note the sustained upward trend in absolute government spending, in contrast to the SUDDEN rise in government spending versus GDP in 2008 and, in most countries, the slight fall since. If you compare this chart to the GDP chart you will see that the rise and fall of this graph is caused mainly by changes in GDP. I've analysed these movements in more detail in this post.

There is a constant theme throughout this post, isn't there? The European economic landscape changed fundamentally in 2008.  Since then unemployment has risen, GDP has fallen, government debt has risen - in some cases almost sufficiently to bankrupt the country - and government spending has risen.

What happened in 2008 was not a sovereign debt crisis. Nor was it a currency crisis. It was a banking collapse. That collapse forced private debts onto sovereign balance sheets. It caused the deepest recession since the 1930s. It caused job losses and wage cuts across Europe, leading to increases in benefits bills and consequent rises in government spending. It caused economic stagnation as banks cut back lending, restricting the business finance essential to economic growth.

And what is STILL GOING ON in Europe is a banking collapse. The banking collapse of 2008 has not ended. We have not repaired our broken financial system. We are still terrified of the consequences of bank failure. We are sacrificing the future of an entire generation to prop up insolvent financial institutions and a failed currency experiment. WE ARE STILL BAILING OUT BANKS. The latest is Bankia. It will not be the last.

The worst is yet to come.

Friday, 25 May 2012

Silly charts and bad economics

A short while ago, the esteemed Adam Smith Institute (ASI) produced this chart as part of a post from Sam Bowman:

I criticised the chart in this post on four grounds:

- the figures were not adjusted for inflation
- the figures were shown in Euros, which meant that the UK's spending in 2009 was overstated because of the devaluation of sterling
- the figures were not quoted in relation to the size of the countries' economies
- there was no allowance for cyclicality (automatic increase in government spending as benefits bills increase in economic downturns due to unemployment and wage cuts).

And I produced a lot of charts of my own showing that when the above are taken into account, the conclusions of Sam Bowman's post - that there hadn't yet been any serious spending cuts and there was far worse to come - were only partly justified.

So what did the ASI do? They issued the same chart AGAIN in a different post, by Vuk Vukovic. And he produced from it an even more mistaken analysis.

I pointed this out in a comment on the blog, and to my amusement the ASI then replaced the chart with this one:

Spot the difference? Yes - these are real rather than nominal figures. But the chart is are still in Euros and we don't know if allowance has been made for translation differences for the UK, there is still no attempt to relate the spending figures to economic output (GDP) and it still makes no allowance for cyclical factors. So this chart is no more meaningful than the previous one.

Showing absolute figures without reference to the size of the economy gives a completely misleading impression. To help make my point, here's a silly chart of my own:

This chart shows European government debt absolute figures, irrespective of GDP - in Euros, so no allowance for sterling depreciation. Who exactly has the biggest debt pile? Yup, that's right. Since 2009, Germany. And Greece has the lowest (of these countries, anyway). So if we take absolute figures only, ignoring the size of the economy - which is what the ASI does with their chart - then it should be German debt on which yields are heading for the moon. It should be Germany facing default and exit from the Eurozone. It should be Germany facing sanctions and fines. Shouldn't it?

But when you plot European debt in relation to GDP - as it is usually shown - the picture changes completely:

Germany's debt pile looks - er, quite large, at 82% of GDP, which is well above the Maastricht convergence criteria. In fact it looks about the same as France's and the UK's. Spain's debt/GDP is actually lower at the moment, though I reckon that will change radically when it is forced to bail out its banks and its regions, as will happen pretty soon. But Germany's debt certainly isn't the largest in the Eurozone when you compare it to GDP. That honour, surprise surprise, belongs to Greece.

In fact the debt to GDP chart is no more sensible than the absolute debt chart. Debt is accumulated deficits over years, whereas GDP is an annual figure; it could therefore be argued that quoting government debt in relation to GDP compares apples and oranges. It certainly tells you absolutely nothing about the ability of the assets of the country to support that level of debt - which is the country's solvency. What would arguably be better would be to map the COST of debt - interest payments and refinancing - in a given year against GDP. That at least would give some idea of the ability of the economy to service the debt. However, I digress.

To be fair to the ASI, their chart does show that governments in Europe generally are increasing their spending rather than reducing it - which is the point they were making.  But it isn't that simple. My final objection to their graph is that it takes no account of cyclical factors. All of the countries in the ASI's graph are in recession at the moment: Greece's recession is the worst in recorded history. When people are losing their jobs and experiencing wage cuts - which is what happens in recessions - the benefits bill automatically increases, so Government spending increases as the economy contracts. So there may be real cuts in government spending in other areas, but the effect of these on the total Government spending bill may be wiped out by the automatic increase.

Attempting to reduce the benefits bill is completely counterproductive. Benefits soften the impact of unemployment and wage cuts, but they do not fully replace the lost income - nor should they, or there would be no incentive for people to seek work. People therefore suffer reduction in their real incomes, and that causes a  real demand decrease in the economy despite the automatic increase in government spending. Without those benefits the demand reduction would be far greater. Therefore cyclical increase in government spending does not constitute economic stimulus in the sense of actively trying to create growth, whatever Vukovic may think.  All it does is prevent demand falling off a cliff.

Vukovic argues that "entitlements" - which would include unemployment and in-work benefits - should be cut to "reduce dependency on the state". He suggests that the private sector cannot expand because the public sector is crowding it out. But unemployment in Spain is at 25% and youth unemployment is at an all-time high across Europe. There is clearly spare capacity - lots of it. It is NOT POSSIBLE for the public sector to be crowding out the private sector at the moment. What is actually happening is that the private sector is retrenching - it is hoarding cash, paying off debt and waiting for better times. There is no evidence that the private sector in any of these countries is yet ready to provide the jobs and wages that are needed to enable the benefits bill to reduce naturally. Cutting benefits would therefore cause real deprivation. It is a simply appalling idea that shows a comprehensive lack of understanding both of the situation in Europe and, frankly, of basic economics.

Edward Harrison produced a post earlier today in which he bewailed the fact that people don't seem to understand national accounting. Vukovic's post demonstrates this in spades. Government spending cuts DON'T "allow the private sector to expand" when the economy is operating at less than full capacity. Unless they are matched by equivalent tax cuts they force the private sector to bear more cost, which reduces its ability to save and to invest.

I am certainly not arguing for out-of-control government spending such as that demonstrated by Greece in the years prior to the financial crisis. Nor am I suggesting that structural reforms are not needed in many of these countries. But trying to cut the absolute amount of government spending in a recession will make the recession even worse, and attempting to reduce or dismantle unemployment and in-work benefits (automatic stabilisers) will cause real suffering. Even the IMF - hardly a supporter of profligate government spending - is now suggesting that the pace of fiscal consolidation should be gentler and automatic stabilisers should be allowed to do their job.

The ASI might as well have titled Vukovic's post "How to have an even longer and deeper recession in Europe". Because that's what he is proposing.

Monday, 21 May 2012

JP Morgan and rabbits

When my children were little we used to keep rabbits. Rather a lot of rabbits, actually - because of an all-too-well-timed escape by our natural male rabbit, we ended up with eight when we had previously only had three.  Two, including our male, were caught by foxes, but the rest lived happily together in a small shed leading to a large open-air run. Until one day they dug out of the run and had a big party all over the garden.

I was busy teaching at the time and didn't know about the escape until my daughter came running in screaming that the rabbits were on the lawn. We all (including my student) went out there, rounded them up and returned them to their pen. But it was apparent that all was not well. Most of them were injured, two quite seriously. I immediately thought that the foxes had attempted to catch them - but that turned out not to be the case. When I took them to the vet, the vet commented that the injuries were consistent with rabbits fighting.

FIGHTING? Mum and kids? They had never done that before. What on earth was going on?

It turned out that Mum was not well. In fact she had terminal cancer and we had to have her put down a few days later. So the rabbit fight was because Mum, who had previously run a very tight ship, was no longer in control, and the daughters were fighting for supremacy. (Our two neutered males, who were both of gentle disposition, didn't seem to have been significantly involved). The fighting continued after Mum died and eventually we had to separate one of the daughters and put her in a hutch on her own. I'm still not sure I isolated the real culprit.

So what has a rabbit fight got to do with JP Morgan?

The Chief Investment Office (CIO) was run by a formidable woman, Ina Drew. Drew had run a very tight ship during the financial crisis and was renowned for keeping a cool head and remaining in control when everyone else was panicking. She was trusted absolutely by Jamie Dimon, the CEO, who therefore didn't pay much attention to what was going on in the CIO.

But Drew contracted Lyme disease in 2010 and after that, it seems, was not fully in control. From the New York Times:
"....she was frequently out of the office for a critical period, when her unit was making riskier bets, and her absences allowed long-simmering internal divisions and clashing egos to come to the fore, the traders said...."
Mum was the daughters fought. And note that this is not just about personalities, it is about who is going to be "top rabbit". In the cut-throat world of investment banking, the way to ensure promotion is to make a LOT of money for the firm. I have no doubt that the heads of the London and New York offices were competing for Drew's job.  So Achilles Macris, the head of the London office, encouraged larger and riskier trading in order to build up his portfolio and make lots more money.  The only people who could really have reined him in were Drew, who was not compos mentis, and Dimon, who didn't have his eye on the ball. Althea Duersten, the head of the New York Office, it seems tried to limit his activities, but she lacked the position and authority to do so and her interventions just made the "personality clashes" worse. And she was trying to build up her own position too:
“It felt like there was a land grab where no one was pushing back because Althea and Achilles both wanted more responsibility,” one of the former traders said." 
In the end, in an uncomfortable echo of my separation of the fighting rabbits - or, perhaps more chillingly, of the eviction of Snowball in Orwell's "Animal Farm" - Duersten took early retirement. She was replaced by Irene Tse, who as a newcomer to the CIO had little chance of standing up to Macris. Blood on the floor continued throughout 2011:
"On the conference calls, the yelling continued, only now it was between Ms. Tse and Mr. Macris...."
And no-one it seems was paying any attention at all to the huge risky bets being taken by Macris and his sidekick Iksil, the so-called "London Whale". Except hedge funds, who were fascinated by the market distortions these trades were causing and were making some risky bets of their own in the hope of making a killing when, as they expected, the whole edifice blew up. They were proved right.

Predictably, this sorry tale has led once again to calls for increased regulation of banking activities. There has been much discussion of whether the so-called "Volcker Rule" has been breached, and whether this affair shows that Dimon's famous calls for deregulation of banking are misconceived. The calls for reintroduction of "Glass-Steagall" separation of commercial and invesment banking have grown even louder and more strident, and in the UK, the Treasury commented that the JP Morgan losses "prove" that ringfencing of retail and investment banking is the right thing to do.

But this is a tale not of lack of regulation, but of lack of observation. Lisa Pollack of FTAlphaville, in her excellent "Whale Watching Tour" series of posts, asked "whither the regulators?" Asleep on the job, it seems. Others have asked why Dimon brushed off reports that these trades were highly risky - Dimon reportedly describing them as a "tempest in a teapot". Drew herself it seems minimised the significance of these trades in her reports to Dimon, giving the impression of being in control of the situation when she was not. It all boils down to a thoroughly nasty piece of corporate game-playing under the nose of a distracted CEO and complacent (or maybe even complicit) regulators.

So apparently investment bankers behave just like rabbits. Sad, isn't it?

Friday, 18 May 2012

Liquidity matters

There has been much discussion recently about whether banks are insolvent or simply illiquid, and indeed similar discussions about some European countries. Mervyn King said that the problem in Europe was solvency, not liquidity - but the ECB has been providing lots of liquidity to keep the banking system and, indirectly, European sovereigns afloat. So what is the difference between insolvency and illiquidity?

Here's an illustration. Suppose I go to the pub with a friend, and when I get there I discover that I have no cash. So my friend buys me a drink. Am I illiquid or insolvent?

It all depends why I have no cash. If the reason I have no cash is that the kids cleaned me out earlier and I forgot to go to the cashpoint, but there is money in the bank that is not earmarked for another purpose (and this is important), then I am illiquid. I don't have ready money available, but I'm not broke. Next time I meet up with my friend, I will have no difficulty buying him a drink in return.

But if the reason I have no cash is that there is no money in the bank, so I can't get any money out, then there are several possibilities.

- If I have reached the end of the month and run out of money, but payday is on Tuesday, then I am illiquid. I have a cash flow problem: in theory I have the money I need, but it isn't available when I need it. Most small businesses (including mine) have cash flow problems of this kind: we issue invoices, but we have little control over when we receive the money, and in the meantime the bills must be paid. Financing this kind of illiquidity requires working capital finance, usually in the form of an overdraft - although very short-term loans at high interest rates can be another way of covering cash flow problems.

- If I have no money because the mortgage payments on my house are taking every penny I earn and I can't afford to eat let alone buy a drink, then provided the house is worth more than the mortgage I am illiquid. I know people will struggle with this idea - surely if the mortgage is unaffordable I am bankrupt? No, I'm not. My money is tied up in assets that aren't easily realisable and my income is earmarked for debt service. If I were to sell my house, I would solve my problem.  My "net worth" is still more than the amount I owe. People who are deeply in debt and struggling to meet the payments are often actually illiquid rather than bankrupt (insolvent): what matters is the total value of their assets versus the total amount they owe. If they were to sell everything they own at current market prices, would the amount raised be sufficient to pay off their debts? If it would, they are illiquid. If it wouldn't, they are insolvent. I hope this is clear, because the question of asset value is very important when it comes to considering whether the likes of Greece are insolvent or illiquid.

- If I have no money because I've lost my job, I'm renting somewhere but I can't afford the rent and I don't have anything I can sell to raise money, then I am insolvent. This may be a temporary problem - plenty of people are temporarily insolvent when they lose their jobs, but provided they can borrow some cash to keep them going while they look for another job, this can resolve itself.  It is quite wrong to suggest, as some have, that no-one will lend to someone who is temporarily insolvent. The rates will probably be pretty high, but funds can usually be found. The question is how "temporary" the insolvency is, of course. As time goes on, it becomes harder and harder to borrow money, and the rising debt burden deepens the insolvency. Eventually insolvency becomes fixed - the individual (or business) is bankrupt, because the amount of money required to pay off the debts is more than they can raise even when they find another job. How quickly temporary insolvency becomes permanent depends on whether loans can be rescheduled, interest payments reduced and so on. But if I move in with Mum & Dad who are happy to fund me indefinitely, I may be technically insolvent but I can always buy drinks and I may never need to find another job. They will provide me with the money I need to service my debts and I will eventually pay off the debts (or rather, Mum & Dad will). Unless Mum & Dad die or go bankrupt, of course.

I'm sure it is clear by now that the distinction between illiquidity and insolvency is a very fine one.  The "job loss" example is particularly confusing, because many people find it hard to tell the difference between temporary insolvency and illiquidity. The difference is certainty. Someone who has a contractual right to receive an agreed amount of money which is sufficient to meet their current obligations (debt service, rent etc.) is not usually regarded as insolvent even if the total amount they owe is greater than the value of their current assets. Someone who has no idea when they will get another job is insolvent if they owe more than their current assets, even if they can meet their current obligations, because they have no certainty of future income. And if someone's certain future income is insufficient to meet their current obligations, they would probably be regarded as insolvent if their assets are worth less than the total amount they owe, even though their immediate problem is lack of cash. I hope that makes sense.

Banks are illiquid by nature. One of their principal functions is "maturity transformation". This means that they borrow money on a short-term basis to settle lending that is much longer-term. Loans such as mortgages are "assets" to banks, deposits and other forms of borrowing are "liabilities". Bank assets tend to be longer-term than liabilities and not easily realisable. So banks have a cash problem. If lots of people turn up in their branches demanding to withdraw their money, they don't have enough money on hand to meet that demand - they may literally run out of money. Sudden large-scale deposit withdrawals are called "bank runs" and they can cause banks to fail.

Both insolvency and illiquidity are potentially lethal. It doesn't matter how much your crumbling ancestral pile is worth if you haven't got enough income to pay the council tax. You may be technically solvent, but your local authority isn't going to be very impressed if you can't stump up the cash. This is the problem with a bank run. Bank creditors - ordinary depositors - demand their money back, but the money is tied up in the banking equivalent of a crumbling ancestral pile (a big heap of mortgages and commercial loans) and the bank can't pay. This is what happened to Northern Rock. When the bank run happened, the Government assumed that Northern Rock's problem was lack of cash, so it provided funds. THIS IS A REASONABLE THING TO DO if a solvent business runs out of cash. Perfectly sound businesses - not just banks - can be brought down by cash flow problems.

Bank runs are NOT an indicator that banks, or the banking system, are insolvent. Insolvency is to do with the balance of assets and liabilities, not whether creditors can be paid. But in the financial crisis banks did turn out to be insolvent. Why?

In the financial crisis, banking assets - loans, and products derived from them - lost value. This is a complex area and I won't go into detail here, but suffice it to say that mortgages and mortgage-related products turned out to be worth considerably less than previously thought. The market for certain products completely collapsed, making those products effectively worthless. The asset side of bank balance sheets shrank dramatically, but the liabilities remained the same. At the time, banks had very little in the way of shareholders' funds (equity), which can be regarded as money they don't owe to anybody, so it didn't take a huge fall in asset values to force losses on creditors. This was insolvency: their total assets were worth less than the amount they owed. Now, remember what I said about temporary insolvency and the bank of Mum & Dad. If banks have good cash flow they can keep going forever even when they are actually insolvent. And in Japan they have been doing so for years - the central bank provides them with money and they keep trading even though their balance sheets are stuffed full of loans that will never be paid back. These are what we call "zombie" banks - they are only kept alive by constant transfusions of central bank funds.

So, looking at Europe now - are European banks really insolvent, or just illiquid? And are the distressed countries insolvent, or just illiquid?

These two questions are related.  European banks are highly exposed to European sovereign debt. So if the sovereign debt of Greece becomes worthless because the sovereign is believed to be insolvent, its banks - which hold the highest proportion of its debt - are likely to be bankrupted, and so might banks in other countries if they have sufficient Greek debt to wipe out their shareholders' funds and force creditor losses. Germany's Commerzbank, which was partially nationalised in 2009, has taken significant losses on its holdings of Greek, Spanish and Irish debt, though it has narrowly avoided bankruptcy.

But European banks also have awful private sector assets.  In Spain, it's not sovereign debt that is the trouble - it's private debt, bad loans left over from the collapse of the Spanish property bubble in 2008 that are still sitting on Spanish bank balance sheets. Spanish banks look like zombies to me. I'd regard them as insolvent, personally - but they are undoubtedly still trading, and as long as the ECB lends them money they will continue to do so.  Nor are they the only ones. Ireland bailed out its banks after the collapse of its property bubble: the banks are now completely dependent on a highly-indebted sovereign. Portugal's banks have become dependent on ECB funding after being frozen out of interbank markets in 2008. Dexia, the Franco-Belgian bank, was split up and nationalised by the two sovereigns. The UK maintains two partly-nationalised banks, implicitly guarantees the rest (though it has ideas about unwinding this guarantee) and has just finished the largest QE programme in the Western world (I've pointed out before that LTRO and QE amount to the same thing). Austrian banks, especially Erste Bank, have large amounts of private loans to Eastern Europe, particularly Hungary which is something of an economic basket case. There are zombie banks all over Europe, with balance sheets full of dodgy loans and not much in the way of equity, because the EU leadership have totally ignored the desperate need for European bank recapitalisation. And central banks - principally but not exclusively the ECB - are spending humungous amounts of money keeping them alive. The European banks are like indigent jobless youth sponging off Mum & Dad. If the central banks cut off the funding most of them would be on the streets. Why are we propping them up, I want to know?

Now to the distressed Eurozone countries. The worst by far is Greece. Is it insolvent? Well, no. Remember my definition of insolvency - value of total assets less than the total amount owing. I hate to say it, but the assets of the Greek state are worth FAR more than the amount it owes. Anyone care to value the Greek islands? The problem is, of course, whether there are buyers, and whether Greece wants to sell. Regardless of how much assets are worth, if you won't sell them or no-one wants to buy them you STILL can't service your debts. This is - partly - Greece's problem. It either can't or won't sell enough assets to reduce its debt to manageable proportions. And the severe recession it has now been in for over four years is reducing its income. So although it is not strictly insolvent, it can't meet its obligations. What is needed - urgently - are measures to improve its income - and for a country, just as for a marginally solvent business with severe cash flow problems, that means DOING MORE BUSINESS. Cutting costs and collecting more of the tax owed may help, but they will not solve the fundamental problem. There has to be more economic activity. Somehow, Greece has to be pulled out of recession.

In fact NO country in Europe is insolvent. But Eurozone countries do have severe liquidity problems. This is because they have adopted a foreign currency - the Euro - and consequently have no control over money issuance or monetary policy. Countries that issue their own currencies cannot have liquidity problems unless they have large foreign currency liabilities (as Hungary does, for example). They can become insolvent, though, if the productive assets of the country collapse to the point where the currency is backed by not very much. For a currency-issuing sovereign the main indicator of insolvency is hyperinflation. The most recent example of this was Zimbabwe, which trashed its main industry - agriculture - while printing large amounts of currency, and predictably ended up with hyperinflation.

Personally I'd stop the central bank transfusions to Eurobanks and provide liquidity support directly to distressed European sovereigns. There is evidence (Japan, Ireland) that using government funds to maintain zombie banks depresses growth: zombie banks cannot lend, because their balance sheets are already too risky, and that prevents business getting the finance it needs to expand and develop, which is essential if economies are to recover. So my message to the European leadership would be: take your zombie banks off life support. Use the money directly to support businesses, develop infrastructure, put people back to work and restore your economies. And if the zombie banks fail, let them fail. The world will be a better place without them.

Sunday, 13 May 2012

Who has REALLY benefited from Euro membership?

Just to remind you - the Euro came into being on 1 January 1999. These are the eleven founder members.

To make it even clearer, here is a chart showing only the largest economies among the founder members:

Now, admittedly I am only showing external trade balances. But part of the point of the European Union has always been promotion of trade between its members. The common currency was supposed to improve this by removing currency risk from cross-border trade.

Please tell me what value the common currency has brought to Italy,Spain and France?

And I haven't even included Greece......

The road to hell

I found an interesting chart from the World Bank this week. It shows Greek GDP since 1960.


And here's another chart showing the growth rate of Greek GDP. Note that it is currently shrinking (negative growth).

We hear a lot about the collapse of Greek GDP, and the second chart shows the dimensions of this. Greece is now in its fifth year of recession and things are only getting worse. Though it's interesting to note that Greece had a much sharper drop in 1973-5, probably due to the oil embargo, and also in the early 60s. But those were from a much lower GDP base than the current contraction. And therein lies the problem.

Greece was for a long time a poor economy. Its major industries were agriculture, shipping and tourism. But the first chart shows that after it joined the Euro in 2001, its GDP shot up. What caused this?

Well, it certainly wasn't improvement in exports. Here's another chart showing Greece's export performance:

Note that Greece was ALREADY running a trade deficit when it joined the Euro - in fact its current account deficit had been growing steadily since 1960. Externally it was already uncompetitive when it joined the Euro. And for a while after it joined, the trend continued - imports exceeding exports year-on-year. But it appears that from 2005-2008, Greece's trade balance fell off a cliff. It's not clear from the chart whether this is caused by a massive increase in imports or by export collapse due to the growing uncompetitiveness of the Greek economy versus its main trading partners. I suspect it was elements of both.

Here's Greece's capital account for the same period. Note the extraordinary increase in capital formation since 2001 and particularly since 2005. This capital increase mirrors the increase in the trade deficit. It seems highly unlikely that this capital was internally generated, so what we are in effect looking at here is external funding of Greece's trade deficit.

Capital growth has now stopped and since 2008 capital has been leaving the country. The trade balance is much better, but this is undoubtedly due to reduction in imports rather than export growth - as the second chart shows, Greece is deeply in recession. GDP is falling steadily. And this is the problem.

These charts suggest that the growth in GDP seen since Greece joined the Euro, and particularly since 2005, was caused by a consumption bubble funded by external capital inflows. In 2008 those capital flows abruptly reversed and the consumption bubble collapsed, leaving the country as a whole highly indebted and without sufficient domestic production to support its debt burden or maintain its Euro-generated standard of living.

Greece was already declining as an economy when it joined the Euro. All Euro membership gave it was a huge party at foreigners' expense. Its economy is no more productive than it was in 2001. But its population have come to expect a much higher standard of living, and many of their jobs are provided by a Government whose increased spending was also financed by external borrowing.  So as Greece's economy crashes, its population howls and blames the external people who financed their unsustainable boom. Well, I can blame them too - there is no doubt that the main beneficiaries from Greece's Euro membership have been larger Eurozone economies, particularly Germany, whose banks provided that funding as trade finance for exports and whose economic growth has been partly financed by Greece's imports boom.  But blame doesn't help. The fact is that Greece's economy became dependent on external capital flows. Now those have stopped, and there is no political will anywhere in the Eurozone for them to be restored in the form of fiscal transfers such as exist in other currency unions like Germany and the UK. Greece's economy is in the process of collapsing back to where it was when it joined the Euro, and possibly even lower since it has unquestionably lost competitiveness with regard to its main trading partners. And the first World Bank chart shows that the process has hardly begun. Greece's GDP is now about where it was in 2006. It still has an AWFULLY long way to fall.

The story that these World Bank charts tell is a terrible one. Euro membership has been an unmitigated disaster for Greece. It is now on the road to hell. It cannot stop, it cannot go back, and the only exit is a cliff edge. Leaving the Euro would result in sudden catastrophic currency devaluation, production collapse, probably hyperinflation as the Government was forced to monetize debt, terrible poverty, violent disorder (we are already seeing this) and lawlessness. But remaining in the Euro will result in exactly the same, just more slowly.  The Greeks think they are in hell now, but this is paradise compared with what is to come. It's just a question of how quickly they get there.

Saturday, 12 May 2012

So what about that austerity, then?

The other day, Veronique de Rugy produced this chart from Eurostat statistics for European Union government spending

Various writers picked it up as evidence that there haven't been any serious spending cuts anywhere in Europe yet. Sam Bowman at the ASI complained that Eurocountries are moaning about the idea of spending cuts rather than the reality, and warned that the real nightmare is still to come. Is he right?

There are some serious issues with this chart:

- it uses nominal figures rather than real, so does not allow for the effects of inflation. To be fair, De Rugy herself bewails the lack of inflation-adjusted figures.

- the UK's figures are shown in Euros. The UK is not a member of the Euro, so these are translated figures. Sterling was devalued by approx. 25% in 2008/9 versus the Euro: it is creeping back up again but has not yet reached its pre-crisis levels.

- no allowance is made for cyclical factors and the operation of automatic stabilisers. Government spending automatically increases when GDP falls and unemployment rises, as benefits replace wages and higher deficit result in increased interest payments. Conversely, as GDP rises and unemployment falls, Government spending automatically decreases as people move off benefits and into work, business expands and deficit reduces.

- the figures are not related to GDP. This is the most serious problem, and I would have expected better from the ASI. Government spending is meaningless as a standalone figure. If GDP rises but the same nominal amount of  government spending is maintained, this is actually a CONTRACTION of government spending relative to the economy: conversely, if GDP falls but same nominal amount is maintained, that is an EXPANSION of government spending relative to the economy. Failing even to quote GDP figures for comparison gives a completely false impression of government spending.

So this chart is, shall we say, somewhat misleading. I spent a happy evening wading through Eurostat figures for the countries in question plus Germany, and came up with some charts of my own which I hope are rather more useful. I am rubbish at Excel and haven't really got the hang of this charting lark, so please bear with my hamfisted attempts at formatting.

Firstly, here's a chart of Government spending expressed as a percentage of GDP for the countries in question:

You will notice that all the lines are fairly close together, which makes it difficult to read: this suggests that in fact all these countries including the mighty Germany generally have a similar proportion of government spending to economic activity. 45-50% seems to be fairly standard: France is persistently higher, and Spain persistently the lowest. The second thing to note is that ALL the countries show an increase in Government spending relative to GDP 2008/9.  All of them have reduced government spending as a proprtion of GDP to some extent, but none has yet managed to get government spending back to pre-2008 levels. It is very clear therefore that the increased Government spending of deficit countries is mainly due to the financial crisis and ensuing recession. It is also very clear that the supposedly excessive spending of these countries is actually remarkably similar to the spending level of the supposedly prudent Germany - and quite a bit less than France.  So can we please stop talking about profligate Southern states? With the exception of Greece (to which I shall return), they are evidently no more profligate than anyone else.

I've also plotted GDP by itself for each of the countries in question:

It is very clear from the chart that the UK was by far the hardest hit economy in the financial crisis and ensuing recession. I've left the UK's figures in euros, so the drop in GDP is overstated to some extent from mid-2008 onwards because of the devaluation of sterling. Nonetheless, the UK's economy fell off a cliff in 2007/8 and is still well below its level at the start of 2007. This is unquestionably because of the dominance of the financial services sector in the UK economy and its close ties to the US.

I've probably sent most of you to sleep by now, but if anyone is still awake here are a few more charts to amuse you. I've plotted government spending % of GDP against GDP itself for each of the countries. The purpose of this is to demonstrate how government spending varies as a proportion of GDP as GDP changes.   I've done one chart for each country because otherwise it gets very complicated and difficult to read. The Eurostat GDP figures are in millions of Euro: for all countries except Greece I have divided by a further 100,000 to get to a 2-digit figure, so the figures are in 100bn increments. Because Greece's economy is so much smaller I have only divided by 10,000, so its figures are in 10bn increments. I hope that makes sense.

Firstly, here is Germany's chart:

Germany's habitual fiscal tightening is evident. Note the drop in Government spending both before 2008 and after 2009 is sharper than the corresponding rise in GDP: if nominal Government spending were being maintained one would expect these at least to match - and as I pointed out above, really the proportion of Govt spending to GDP should remain constant as GDP grows. Germans know what austerity is like - they have experienced it every year since 2000 with the exception of 2008. I haven't looked at wage levels, but I'd be willing to bet that those are held down too. I think they call this beggar-my-neighbour.

Now here is France's chart:

 At this point I wonder if France and Germany really have anything in common. Not only does France have the highest proportion of Government spending to GDP of any of these countries, it has made no attempt to cut it. Sam's comments about unrest being more about the idea of austerity than the reality certainly apply to France. The variation in Government spending to GDP shown in the chart can be entirely explained by cyclical factors.

Greece's chart is also interesting:

Note the rise in Government spending relative to GDP until 2009. This is the unsustainable debt bubble that is now collapsing, causing pain and hardship particularly (though not exclusively) to those Greeks whose livelihoods depended on that bubble - notably public sector workers, pensioners and welfare recipients. But these figures suggest that it isn't collapsing that fast, really.

Spain's chart is almost the opposite of Greece's, and I feel genuinely sorry for them:

Prior to the financial crisis their GDP was growing and they were maintaining but not increasing government spending as a proportion of GDP. They were doing it right - more right in my view than Germany, which was putting its population through unnecessary pain. But they were caught by the collapse of the property market in 2008, and now are under pressure to reduce their government spending back to pre-2008 proportions. This pressure is being applied principally by Germany, which according to my first chart still has a HIGHER proportion of Government spending to GDP despite all its austerity. There is absolutely no justice in the Eurozone.

Italy for some reason over-reacted to the financial crisis, expanding its Government spending relative to GDP perhaps more than was really justified:

It is now cutting Government spending relative to GDP though its economy is not growing. This is painful, unpopular and quite possibly counterproductive. Cutting government spending relative to GDP is only sensible when there is evidence that the private sector will fill the gap. If they won't - and in Italy this is questionable - then cutting Government spending when growth is flat will push the country into recession.

And finally - the UK:

It is evident from the chart that the Brown government responded to the economic collapse in 2007/8 by increasing Government spending considerably as a proportion of GDP. This is a Keynsian response to a severe economic downturn. Economists are undecided on the effectiveness of Keynsian stimulus, but I find it telling that as the proportion of Government spending to GDP has fallen since 2009, so the rate of increase of UK GDP has also begun to slow (see the shallower angle on GDP 2010-11).  I know correlation does not imply causation, but I find it difficult to believe that there is no relation between these two. For me, there is sufficient evidence here a) that the UK Government is indeed making spending cuts, whatever the ASI may think, although as yet not very deep ones b) that those spending cuts are associated with slower growth. The operation of automatic stabilisers should cause the proportion of Government spending to increase not decrease as growth slows - the reverse is simply not possible. Therefore I am forced to the conclusion that there are indeed real spending cuts and that those spending cuts may be causing UK GDP growth to slow (although there may also be other reasons for the slowdown).

So Sam Bowman is both wrong and right. There are genuine spending cuts, though not in every country and not all that deep, even in Greece. But his final conclusion is worryingly accurate. Whether or not these countries are making spending cuts now is not the issue. It is what they still have to do to restore their economies to health. I was struck by the similarity in the GDP curves for all these countries - more easily seen on this chart from the World Bank, which is based from 2000 (I only extracted Eurostat data from 2005, so my chart above starts halfway up the curve):

 ALL these countries until 2008 (2007 for the UK) experienced GDP expansion funded by unsustainable debt - and that includes Germany, whose trade surplus is funded by high levels of cross-border assets in both its commercial banks and, since 2008, its central bank. This cross-border debt bubble is currently being maintained by bailouts and central bank monetization. But this is not a sustainable policy. The debt bubble will burst eventually, and when it does all these countries, including the mighty Germany, will experience severe deflation and banking system meltdown.

Thursday, 3 May 2012

The naked King

In this post I use a number of charts from various sources. I hope you will bear with the mishmash of formats and fonts: I did think about doing my own charts, for consistency, but hey, life's too short!

Yesterday the Governor of the Bank of England gave a lecture broadcast on BBC Radio 4, and was then interviewed by Evan Davis. The full text of his lecture is here and you can also listen to part of the broadcast interview.

Mervyn King was the Governor of the Bank of England during the financial crisis and was responsible for the exceptional actions taken during that period to support the banking system. In partnership with the  Government and the rest of the Monetary Policy Committee (MPC), he has effectively managed the UK economy from 2003.

In his lecture and ensuing interview, did Mervyn King admit any responsibility for the financial crisis? No. He makes the extraordinary claim that "this was a bust without a boom" and followed it up in the interview with Davis with the even more extraordinary claim that the economy's growth prior to 2008 was sustainable. His evidence for this is that inflation was low, and unemployment was low, therefore had interest rates been higher they would have had a deflationary effect. Now, it is correct to say that the MPC's primary responsibility is to keep inflation under control. I had a look at the UK CPI (Consumer Price Index) inflation profile from 1997-2008 (i.e. since the independence of the Bank of England) and this is what I found:

Historical Data Chart

The Bank of England's inflation target for a long time has been 2%. And for the first half of the 2000s this chart shows that CPI inflation was in fact mostly between 1-2%, which is not a bad record. But from 2004 onwards - shortly after King took over as Governor - CPI inflation started to rise. Did the MPC raise interest rates to counter the inflationary trend? Let's have a look:

Future interest rates: Published by the Bank of England on 15 February, this shows the market's expectation for the base rate

Odd. It seems to have raised interest rates in 2003, when inflation was below 2%, then left them either unchanged or even reduced them in 2004/5 when inflation was rising. It didn't start raising interest rates until 2007, by which time it was all over bar the shouting - and arguably the interest rate rises in 2007 made an already bad economic situation worse. Stunningly good economic management, I must say.

In my view CPI inflation would have risen a whole lot more had the UK not been flooded with cheap imports from emerging markets:

In effect, the UK's increasing trade deficit and high cost base relative to its trade partners is what kept its CPI inflation rate lowish during this period. To be fair, King wasn't in any way responsible for that. A monetary policy response to discourage imports would have involved cutting interest rates, which would unquestionably have been a bad idea - it would have increased inflationary pressures and given even more encouragement to banks to lend recklessly. There are definite limits to monetary policy, and this is one of them: monetary policy cannot compensate for declining exports.  Responsibility for the UK's poor export performance lies with the Government, not the Bank of England, and I don't mean just the Blair /Brown Government: the UK's trade deficit started to rise under Margaret Thatcher, at least partly as a consequence of the destruction of the UK's manufacturing base.

But the MPC only considers CPI inflation. That doesn't include house prices. This is how house prices behaved during that time:


Looks like inflation to me - rather a lot of inflation. This led to people taking on higher and higher income multiples, providing smaller and smaller deposits and generally over-mortgaging themselves. Household debt in the UK is something like 100% of GDP, of which by far the largest portion is mortgages. Many people are so over-extended that a rise in mortgage rates may mean cutting expenditure on essentials such as food. How can King IGNORE this? How can he say that economic growth founded on such enormous private debt is sustainable? Oh yes - he wasn't responsible for tracking asset price rises, only for managing CPI inflation. So to him, the economy had low inflation even though it was experiencing the biggest house price boom in history. I think they call this doublethink.

So King's claim that inflation was low is iffy to say the least. Is he any more accurate on unemployment? Here's the UK's unemployment record from 1971-2008 (I've chosen this time period because of King's remarks about the 1970s and 80s):
Historical Data Chart

So yes, from 2001-7 UK unemployment was indeed lower than at any time since 1976. But wait - wasn't that the year that the Chancellor was forced to go to the IMF for a loan because the country's finances were in such a bad state after the recession of 1973-5? Yes, inflation touched 27% in August 1975, but that wasn't caused by a boom - it was caused by a combination of currency devaluation, external shock (oil price rise after the Yom Kippur war) and high wage demands in unionised industries. Unemployment rose as a consequence of distressed economic policies such as the three-day week - and it has NEVER RECOVERED. The "low unemployment" of the mid-2000s was HIGHER than the unemployment level in the 1973-75 recession.

So to me, King's claims that the economy had low inflation, when there was a massive house price boom, and low unemployment, when the unemployment rate was higher than in the 1970s, look like an attempt to escape any responsibility for the way in which the economy was managed in the 2000s. Interest rates during that period were lower than at any time since the second world war - and yet there was a lending boom. By his own admission, King KNEW banks were borrowing and lending far too much. Why didn't he raise interest rates? He comments to Davis that most of the pressure at the time was for interest rates to be cut. But a genuinely independent Bank of England would surely do the right thing for the economy, whatever the political pressure to do otherwise? Was it just that they didn't see the need? Or could it be that the MPC was swayed by political considerations and media squalls?

But if the MPC was swayed by political pressures before the financial crisis, what confidence can we have that they are any more independent now? And if they simply didn't see the need for interest rate rises or other measures to choke off the lending boom, why should we believe that they would see such a need in the future? What confidence can we have that the Bank of England's new regulatory body for banks, the Financial Policy Committee (FPC), will operate with genuine independence either? King talks about the FPC "taking away the punchbowl" when things in the financial sector start to get out of control. But the MPC could have done that, and didn't. Why should we believe that either of these committees would be any more likely to do so in future?

In fact one of the biggest challenges that the new regulatory body faces is trying to identify excessive volume and risk in the financial sector early enough to do something about it. The Fed DID raise interest rates, in 2005, in an effort to prick the mortgage lending bubble, but by that time it was too late - lending was already out of control and all it did was cause precipitous collapse of the sub-prime housing market. And in the UK the BoE did nothing despite the mounting evidence of an out-of-control credit boom.  Arguably the seeds of the lending boom were sown in the interest rate cuts that were made on both sides of the Atlantic to support the financial sector after the 9/11 disaster. It's very easy to be wise after the event, but I can forgive people for not seeing at the time that they were over-reacting to an appalling event. But I can definitely criticise the MPC for failing to take action when it became apparent that lending was spiralling out of control. King's arguments that they "didn't see it coming" and "didn't believe it would happen" are naive. There are enough people who DID see it coming. It's just that no-one wanted to listen to them. Everyone was busy enjoying the good times and didn't want to hear bad news from the Cassandras.

You see, the fact is that we LIKE a certain amount of volume and risk in lending. We don't like it to be difficult to obtain credit to buy our houses and our cars: we don't want to have to put down large deposits or provide evidence of good steady earnings to obtain a mortgage. The Government is currently encouraging mortgage lenders to lend 95% of property value, despite the fact that these "sub-prime" mortgages are vulnerable to property price falls. There is much whining from the SME sector about the lack of cheap bank finance for risky startups and expansion. Yes, we want banking to be safer - but not if it scuppers our plans and stops us having the things we want.

So we have strident calls for banks to be "broken up", for the State to provide financing for SMEs and help to first-time buyers, for banks to be forced to lend.  None of these are coherent arguments - they amount to retaliatory attacks from people who are understandably angry about bailed-out banks refusing to help them.

King's "three R's" -  "regulate, resolve and restructure" - look uncomfortably like American marketing to me and I suspect him of playing to the gallery. And the proposals that I have seen for at least two of these are inadequate.

  • I've moaned about ring-fencing before, but here we go again. Ring-fencing only applies to three banks in the UK (HSBC, Barclays and RBS). It wouldn't have prevented the failure of ANY of the UK banks that went down in the crisis, nor would it have made any of them easier to resolve (except possibly RBS). And the American experience shows that although separation of retail banking does provide a measure of protection for ordinary customers, it also gives huge incentive to unregulated financial institutions to find ways of doing bank-like things such as taking deposits and lending. The so-called "shadow banking" network, which nearly collapsed in the crisis and was extensively bailed out by the Fed and the US government, grew to enormous proportions BECAUSE it was unregulated. The US is trying to bring this network into the light by regulating FUNCTIONS rather than institutions. It seems the UK wants to go in the opposite direction. 
  • Calls for banks to have more capital in relation to debt are sensible - so let's pay more attention to the leverage ratio, please! Calls for banks to have more capital in relation to risk weighted assets fail to address the problem that the risk calculations themselves are opaque and complex and regulators don't understand them. But if they are simplified - as they were under Basel I - they are an inadequate measure of risk. 
  • There are no proposals to amend the tax system to encourage equity financing over debt. It is not just banks that are short of capital. Many corporates are highly leveraged because of the preference for debt financing over equity. The fact is that debt financing benefits both the company (because interest on debt is a business expense so is paid from UNTAXED income) and the investor (because if it all goes pear-shaped creditors' claims are senior to those of equity investors). The standard measure of company performance, RoE (Return on Equity), also encourages companies to keep their equity base small. Until some action is taken at Government level to encourage equity investment, getting ANY company - not just banks - to increase their shareholders' capital will be like pulling teeth. 
And here is the worst thing of all. King is clearly trying to reassure people that everything will be fine once the "brave new world" of the Bank of England controlling everything via its different committees is up and running. But nothing has changed really......
  • We still have a fragmented regulatory system. It's just fragmented differently now. And it's still made up of the same people who failed so terribly in their regulatory responsibilities. 
  • We still have the economy managed by people who wouldn't recognise a bubble if it floated past the end of their nose, and who bend with every passing political wind
  • We still have an economic orthodoxy that treats private debt as irrelevant and has not the faintest idea how bank lending actually works
  • We still have a Monetary Policy Committee that has no mandate to manage asset price inflation
  • We still have a Government that is trying to use monetary policy to compensate for fiscal incompetence and lack of coherent economic strategy
  • We still have an economy that relies on debt to give people what they want and need. The individual debt burden continues to rise. 
King warns at the end of his lecture that taking away the punchbowl wouldn't be popular. He's right - preventing people borrowing to buy houses and finance businesses won't win elections. No Government facing an election would ever allow the MPC to pursue such policies. The Bank of England is only as independent as the Government allows it to be. So the punchbowl is set to stay and there will be more wild parties, and more massive hangovers, in the future.